What Should You Know About Pre-Market Trading?

Traders tend to take different approaches and strategies. A day trader is someone who’s obviously different in many ways from the typical long-term investor because they’re actively involved in the markets every day, while most long-term investors are advised to avoid looking at their portfolios too often.

One of the main strategies employed by a lot of successful day traders is pre-market trading, but it can be a risky and complex strategy, so many people wonder what its advantages are and also what the possible disadvantages are.

The following is a rundown of some of the main pros and cons of this particular strategy and a bit of an overview.

What Are Pre-Market Hours?

Pre-market trading refers, as the name implies, to the hours before the markets open, which here in the U.S. is 9:30 a.m. The concept of after-hours trading is essentially the same, you’re just possibly referring to different time frames, but overall ideas are in line with one another.

Company Announcements

One of the biggest reasons a lot of day traders are interested in pre- and after-hours trading is the fact that these are the times when companies are most likely to make big announcements. Most companies aren’t going to make pivotal announcements, whether good or bad, during the trading session because it can cause volatility and fluctuations in pricing that aren’t really reflective of market value.

Usually, if a company can make announcements, particularly bad ones, before trading hours, then there can be some sense of normalcy that returns by the time markets do open so they can help protect their stock and make sure it’s a bit closer to fair value.

Convenience

For some traders, the desire to do pre-market activities may come down to the simple desire for convenience. They can hear an announcement made after the closing bell from a company they might have had their eye on, and then go ahead and make their trade without having the wait until the next morning.

It can simply be easier than waiting until later in the day to make a trade or waiting until the following day.

Liquidity

One of the biggest potential problems with pre-market trading that investors should be aware of is a lack of liquidity. Since most trading happens during standard business hours, that means there is going to be more demand for stocks being sold and more shares of stocks that you probably want to buy if you wait until hours when the market is in operation.

If you’re trading at a time when there’s not a lot of liquidity, it can have a big effect on the size of the bid-ask spreads, and that can be expensive.

Another possible risk is price volatility. This is usually higher in pre- and after-market trading hours, and there is also more competition since this tends to be the time when the most experienced traders are making moves.

Ultimately, the decision to trade after hours comes down to a lot of factors from your style of investing to your experience level and risk tolerance. Knowing the pros and cons can help you make an informed decision as to what the best moves are for your strategy and objectives.